Why Mortgage Rates Are Higher After The Fed Funds Rate Cut
As we’ve discussed a few times lately, the Federal Reserve does not control mortgage rates.
When the Fed makes headlines for “lowering rates”, that is a reference to the Fed Funds Rate, a special lending rate between banks.
Sometimes, mortgage rates will fall when the FFR falls, but not always. Consider what happened this week:
The Fed dropped the FFR by 0.500% Tuesday. Immediately, mortgage rates fell by at least 0.1250% across the board.
Then, mortgage rates reversed.
In the two days since the Fed’s meeting, mortgage rates have approached their highest levels of the month.
Mortgage rates are determined by the price of mortgage bonds and after the Fed’s rate cut devalued the U.S. dollar, mortgage bonds are worth less as an investment.
When an investment loses its value, the market tends to be over-weighted with sellers and that pushes the supply-and-demand balance to the supply side.
Extra supply means lower prices and — in the bond market — lower prices leads to higher rates. That’s why mortgage rates are higher now than they have been, even after the Fed Funds Rate cut.
The connection between mortgage rates and the economy as a whole can be a complicated web, but consider this additional evidence that the Fed Funds Rate and mortgage rates are unrelated.
